The IRS finalized proposed regulations under Sec. 6695(g) imposing a penalty on tax return preparers who do not follow certain due-diligence requirements when preparing to file returns for taxpayers who are claiming head-of-household filing status, the earned income tax credit (EITC), the child tax credit, the additional child tax credit (ACTC), or the American opportunity tax credit. The IRS adopted proposed regulations without substantive change, other than adding some examples. It also removed the temporary regulations that were issued with the proposed regulations in 2016.
Before 2015, the due-diligence requirements and the penalty for noncompliance applied only to claims for the EITC. That year, the Protecting Americans From Tax Hikes Act, P.L. 114-113, amended Sec. 6695(g) to also apply to tax return preparers who fail to exercise due diligence when preparing a taxpayer's return with a claim for the child tax credit or ACTC under Sec. 24 or the American opportunity tax credit under Sec. 25A, applicable to returns or claims for refund prepared on or after Dec. 5, 2016, for tax years beginning after Dec. 31, 2015.
For tax years beginning after Dec. 31, 2017, the law known as the Tax Cuts and Jobs Act, P.L. 115-97, added head-of-household filing status to the list of provisions subject to the due-diligence requirements. This new rule applies to tax returns and claims for refund for tax years beginning after Dec. 31, 2017, that are prepared on or after Nov. 7, 2018.
To comply with the due-diligence requirements, the preparer must submit Form 8867, Paid Preparer's Due Diligence Checklist, and must complete the due-diligence worksheet in Form 1040, 1040A, 1040EZ, or any other form the IRS may prescribe for each credit, including showing how each credit was computed and the information used to make the computation. The preparer must not know or have reason to know that any information the preparer used to determine eligibility for, and the amount of, each credit or head-of-household filing status is incorrect. The preparer also must make reasonable inquiries when required, documenting those inquiries and responses contemporaneously.
Finally, the preparer must retain for three years the Form 8867, the worksheet (or alternative records), and the record of how and when the information that was used to determine eligibility for head-or-household filing status and each credit was obtained, including the identity of any person furnishing information and a copy of any document the preparer relied on in preparing the return. The regulations contain numerous examples on the application of the rules.
The penalty is $520 for returns or claims for refund filed in 2019 and is assessed for noncompliance with respect to each tax benefit. Thus, a single return potentially can give rise to multiple penalties.
- T.D. 9842
— By Sally P. Schreiber, J.D., a JofA senior editor.